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Reengineering Redux

Most companies operate on the principle of opaqueness. A leader in the 1990s movement to radically overhaul business processes has a new vision–X-engineering–that puts a premium on transparency and standardization.
September 17, 2003

Reengineering never really went away. It just went underground for a while.

When Michael Hammer and I introduced the concept of reengineering in 1993,the idea of fundamental process redesign caught on with surprising fervor. Almost every company claimed to be doing some form of reengineering, but in truth, a lot of them were just downsizing.

What we meant by reengineering was the fundamental redesign of work with the objective of achieving a dramatic improvement in business performance. We intended to attack costly bureaucracy and the fragmentation of work. Many companies did reengineering the right way and reduced cycle times for critical business processes like new product development, order fulfillment, and customer service. But the challenge of doing this work-it does involve big operational and behavioral changes-and the misuse of the idea led some companies to back away. In the late 1990s, one business historian even suggested that the “age of reengineering was over.”

I believe, however, that the age of reengineering is just beginning. Companies may call their efforts something else, but information technology enables ways of operating that were not easily achievable in the early 1990s.At the same time, the business pressures that encouraged companies to reengineer in the ’90s have intensified. In almost every industry, being a low-cost producer doesn’t confer a significant edge-it’s just table stakes. Customers are more knowledgeable, sophisticated, and exacting. These factors demand that companies make major changes.

I call the next round of change “X-engineering.” The “X” refers to crossing organizational boundaries. Future productivity improvements will come from the redesign of the processes that operate between a company, its customers, suppliers, and partners, and possibly its competitors. Processes that involve transactions between organizations are filled with redundancy, errors, breakdown, and non-value-added costs. In health care, for example, payers (insurers) typically spend 40 cents of every dollar on administrative processes stemming from relationships with providers (doctors and hospitals). Only 60 cents goes toward delivering real care.

But X-engineering will be even more challenging than reengineering. Three principles will be important for success: transparency, standardization, and harmonization.

For a company to collaborate in new ways with its customers and suppliers, all parties must be open about how they operate-including disclosing what doing work really costs. Most companies now operate on the principle of opaqueness. The assumption is that a company has something to “protect.” In truth, most of a company’s processes are the same as those of its competitors. In the long term, a company’s competitive advantage may simply lie in its ability to execute. And execution in a networked world means deeper collaboration with customers and suppliers. That will require transparency. Companies like Wal-Mart, for example, are demanding more information from their suppliers-including disclosure of costs-in order to create extremely efficient supply chains.

The second enabler of X-engineering is standardization. Whole industries could become far more efficient if they would adopt common processes. The financial-services industry, for instance, could be streamlined considerably if banks were willing to share standard process operations. Right now, each major commercial bank insists on maintaining its own “back room,” often at an annual cost of a couple of billion dollars-even though one bank’s back room is much like the next. X-engineering will also require more technology standardization. Organizations are discovering that disparate technologies are impeding communications.

Finally, companies must understand what real process harmonization means. Owens and Minor, the largest U.S. distributor of medical supplies to hospitals, learned that it must consider its selling and order fulfillment processes and its customers’ buying and materials management process as one set of highly integrated tasks. The result: Owens and Minor’s customers saw lower costs and improved service, while the company increased its margins. The lesson is clear: business today is not about throwing products over a wall. The walls must come down.

This article originally appeared in the MIT Technology Insider, a monthly newsletter covering MIT research and commercial spin-off activity.

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